Briefly explain the comparative advantage example (country X and Y)
List five benefits of free international trade
Define: tariff, quota, producer surplus and consumer surplus
List five arguments for trade restrictions
Briefly discuss the movement toward ‘freer trade’
Define: exchange rate, and briefly discuss four reasons that determine exchange rates (appendix)
Briefly describe the current, capital, and statistical discrepancy accounts of the balance of payments.
The Balance of Payments
The balance of payments represents the record of financial transactions between one country and the rest of the world, over a one-year period. It essentially tracks money inflows and outflows over this period. Since its activity is tracked on a balance sheet, then inflows should always equal outflows.
The balance of payments consists of the following accounts:
Current Account- measures import and export transactions, income from assets, and outflows of transfers (foreign aid).
Capital Account-consists of the change in assets (stocks, bonds, real estate) that exists between the U.S. and foreign countries.
Statistical Discrepancy Account- Since the first two accounts do not always balance, a final category in the balance of payments is the Statistical Discrepancy account. It usually takes into account that the imbalance is the result of the use of â€˜previously held moniesâ€™ called foreign reserves. In other words, not all of the monies used in the one year time period (of record) were monies from current transactions, but some was used from the holdings of previous transactions, which occurred in previous years.
*The balance of payments in a nutshell, using only two countries, the United States and China. Letâ€™s say that the U.S has a large trade â€˜deficitâ€™ with China in its current account. In other words, we are importing much more than we are exporting. As a result, China accumulates much additional revenue from the United States. China will look for ways to invest these additional monies, and since the United States offers its best return on investment, China will invest here, which results in a capital account â€˜surplusâ€™, thereby balancing payments between the two countries. This is the overall reasoning in theory.